Research & insight article

Landlords beware - changes to RPI are on the way

The Office for National Statistics (ONS) has announced that it is considering changes in how the Retail Price Index (RPI) is calculated in order to bring it more in line with the Consumer Price Index (CPI).

So what would this mean? Is it just another piece of statistical tinkering for the data geeks to get excited about? Well, actually, you might find that the implications are more serious and wide reaching: historically, the CPI has been lower than the RPI, which means that by realigning it, RPI will inevitably be lowered and anything linked to it – such as movements in pensions, savings, various benefits and taxes, and property rents – will also be lower.

What are the implications for residential landlords? As their inflationary costs will not change, only the way they are measured, RPI will no longer represent actual inflation so will weaken the reasoning behind linking rent reviews to RPI in the first place, which was to cover the actual impact of rising costs.

Without going into too much detail, the main differences between the two indices are which items are in their ‘basket’ and how these items are measured. The CPI, for example, doesn’t include most of the housing-related costs contained within RPI. The difference in the two results has at times been pronounced and the Office for Budget Responsibility has forecast that the overall gap will widen to an average of 1.4 percentage points during the rest of this decade.

RPI & CPI comparison since the introduction of CPI in 1996:

Source: Office for National Statistics

The potential financial impact of this is huge with 4.14m privately rented tenancies in England with an average rent of £184 per week. A rent review conducted in September this year linked to RPI would have a 3.3% uplift, compared to if it were linked to a CPI based figure which would be a 2.9% uplift. This would equate to a loss of revenue of £158.5m in total annual rent increase between the two measures, and in London alone the loss would be £56.9m.

It is worth remembering that social housing rents will be similarly affected. If we use the same approach as adopted in the privately rented sector, the difference between the two measures at a national level would amount to £629m nationally and £18.1m in London – income that the hard pressed social housing can ill afford to lose.

RPI v CPI impact on rent review as at September 2012:

Sources: DCLG; National Housing Federation Home Truths 2012

Given this discrepancy between the measures, four options are now under consideration by the ONS:

Leave the RPI unchanged.

Change how the price increase in clothing is calculated, as this is one of the largest discrepancies between the indices.

Change how price increase is calculated for all the price categories where there are sizeable discrepancies.

Change the formulae entirely to align all RPI completely with that of CPI.

The timeline for the process from consultation to implementation is as follows:

Public consultation ends 30th November 2012

Recommendations for changes to be announced in January 2013

Any changes would be adopted in March 2013

What can landlords do in the meantime? Responding to the consultation document would be a good start and although various analysts believe that the “no change” option is unlikely, the more people who let the Government know that this is a potentially dangerous move – and not just for property – the better. Preparing contingency plans which would take into account the likely reduced scope for rental increases would also be prudent. Building a hedging clause into rental contracts which compensates for potential reduced inflationary uplift is a possible option. Alternatively, landlords may react by increasing base rents across the board. But in any event, moving away from a purely RPI linked rent review would seem advisable.

Landlords would of course need to balance the benefits of counterbalancing the negative impact of a lower rate of retail prices inflation against the possible risk of alienating a good tenant – although this has always been the case at the time of rent review.